Are a Personal Loan Contract and a Personal Loan Agreement Different?

Whenever you get a loan, you might need to sign a personal loan contract or a personal loan agreement. A personal loan agreement and a personal loan contract are two names for the same thing.

They are designed to set expectations for a loan so that both the borrower and the lender understand the terms. A personal loan agreement can be referred to if there are questions about repayment, and it can be used to legally enforce terms if one party doesn’t adhere to them.

For loans by a commercial lender, the lender will provide the agreement. You will need to create your own contract for loans between friends or relatives.

What Is a Personal Loan Agreement?

A personal loan agreement is a legally binding document designed to clearly define the terms of repayment for a loan, in addition to what’s expected of the borrower and the lender. It should include information about the amount borrowed, the interest charges associated with the loan, any fees that are part of the process, and a repayment schedule that details when the loan should be repaid and what installments will be used.

Because a personal loan contract is legally binding, a lender can take a borrower to court and have repayment ordered, including in the form of wage garnishment, a lien, or some other recourse.

In many cases, personal loans are unsecured, meaning you don’t need to have some form of collateral to secure the loan. Basically, your creditworthiness is what’s considered, not whether you have something valuable like a car or a home that can be repossessed to offset any credit risk. While it’s possible for a lender to offer a personal loan that requires collateral to secure it, it’s relatively uncommon.

Official lenders like banks, credit unions, and online lenders have their own agreements that you must sign. It might be tempting not to formalize the process for loans between friends or relatives, but this can be a mistake. Using a personal loan agreement when lending to family or friends can ensure that everyone remembers the terms of the loan, in addition to establishing a more official and professional acknowledgment of the debt and when it should be repaid.

What Should Be on a Personal Loan Contract?

Whether you’re signing a personal loan agreement created by someone else or making your own contract, it’s important to make sure you have the necessary information included so that everything is accounted for and the terms are clear.

• Identities of involved parties: Both the borrower and the lender should be identified by name and address. Further information, such as Social Security numbers (SSNs) and driver’s licenses, may also be included as part of a personal loan contract.
• Date of the agreement: Be sure to include the date when the agreement is made and the date when the agreement goes into effect at the beginning of the contract. There should be dates with the signatures as well.
• Loan amount: Include the total amount of the principal (amount being borrowed). If collateral is used to secure the loan, it should also be listed.
• Interest rate: Be sure to include the interest rate, including whether it’s variable or fixed. You should also include the annual percentage rate (APR), which comprises fees as well as interest charges. This will help calculate the total amount to be repaid.
• Repayment schedule: Include the repayment schedule. Often, the schedule is a monthly installment, but it could also be weekly, biweekly, on demand, or at the end of a specified time period.
• Penalties and default provisions: If there are late fees or other penalties, these should be spelled out in the contract. Also, the personal loan agreement should include what constitutes a default and what action can be taken in a court of law, including recovery of collateral, if applicable.
• Jurisdiction or choice of law: Be clear about which state the personal loan agreement is governed by.
• Severability clause: If one part of the personal loan contract is considered illegal or unenforceable, the severability clause is designed to ensure that the rest of the agreement remains binding.
• Entire agreement clause: This specific clause states that the personal loan contract is the entire agreement and that no verbal or other arrangements are part of the agreement.
• Signatures: The borrower and the lender should each sign at the bottom of the agreement. In some cases, it might make sense to have witnesses sign as well or have the document notarized.
  

How to Write a Personal Loan Agreement

When writing a personal loan agreement, it’s important to make sure that you review the document and ensure that it has all the elements of a personal loan contract. It can be a very simple agreement that states each item in its own section.

You can create a hard-copy version or use a service like DocuSign or eSign to complete the paperwork online. You can also find templates on websites like LegalZoom, LawDepot, and Rocket Lawyer.

Below, see a sample personal loan agreement from LawDistrict.

How Do People Use Personal Loans?

Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.

The Bottom Line

A personal loan contract is the same thing as a personal loan agreement. It’s important to make sure that you have a legally binding contract in place, whether you borrow or lend money.

Major lenders will require you to sign an agreement before they disperse funds, but if you’re setting up an agreement with friends or family, it makes sense to create your own personal loan contract.